Action: On August 20, 2014, the Bureau of Ocean Energy Management (BOEM) issued an Advance Notice of Proposed Rulemaking (ANPR) on Risk Management, Financial Assurance and Loss Prevention.¹ In a news release announcing the ANPR, BOEM described the ANPR as instituting a “dialogue” with industry and others on how to improve its risk management program by “modernizing” its current regulations, which are approximately 20 years old.

Comments on the ANPR are due October 20, 2014. BOEM plans to subsequently issue a Notice of Proposed Regulations (NPR), proposing specific regulatory text. After public comments on the NPR, BOEM expects to issue a final rule.

Summary: The end result of BOEM’s rulemaking process will be fundamental changes in BOEM’s risk management rules. The ultimate parameters of those revised rules are anything but clear. BOEM did not issue draft regulations, and seems to be open to widely disparate approaches and rules. Industry members should seriously consider submitting detailed and substantive comments in response to the ANPR to help guide BOEM in the right direction.

The ANPR: The ANPR is organized around four major topics:

• Identification of Pertinent Risks/Liabilities
• Risk Monitoring and Risk Management
• Demonstrating Financial Assurance Over Project Lifecycles
• Financial Assurance, Bonding Levels and Requirements

In the first topic, Identification of Pertinent Risks/Liabilities, BOEM’s goal is developing a comprehensive risk management, financial assurance and loss prevention program to identify, prioritize, and manage the risks associated with activities on the OCS. To investigate this topic, BOEM’s questions centered on (a) the appropriate measures BOEM should consider to evaluate and reduce risk, (b) the information BOEM should collect to estimate the appropriate required type and level of financial assurance, and (c) the reporting requirements to obtain that information.

In the second topic, Risk Monitoring and Risk Management, BOEM seeks comment on the “necessary elements” of a “comprehensive” operational risk management, financial assurance, and loss prevention program. Its questions for this topic are fundamental. For example, what basic elements should the risk management program include? How should BOEM monitor an entity’s organizational strength? Which entities, among lessees, operating rights owners, contractors and subcontractors, should be monitored by BOEM? Should BOEM require prior approval of assignments of rights and obligations, or if not should it at least require evidence of such assignments to be filed with it? And should BOEM require the recording and/or approval of all transfers of purely economic interests?

In the third topic, Demonstrating Financial Assurance Over Project Lifecycles, BOEM notes that the 40- to 50-year, or longer, life of some OCS projects means that new technological and financial challenges may arise as time goes by, and as a result, the appropriate level of financial assurance may vary over time. For this topic, too, BOEM’s questions go to the heart of the basic elements of its risk management program. Which criteria would demonstrate a company’s ability to remain solvent over the long term? Which factors should BOEM consider in assessing an entity’s corporate structure? Should significant financial or legal changes affecting a company automatically trigger a reassessment of that company by BOEM? Should financial assurance requirements be tailored on a case-by-case basis? How should BOEM deal with different financial risks such as risk created by shared ownership, by subdivided interests or by asset transfers from one entity to another? And how should BOEM use standard financial metrics such as net worth and debt to equity ratios?

For the fourth topic, Financial Assurance, Bonding Levels and Requirements, BOEM seeks comment on questions related to how it should change its required forms and levels of financial assurance. Today, BOEM primarily relies on surety bonds, which may take the form of standard amounts of either lease-specific or area-wide (the three areas being the Gulf of Mexico and Atlantic Coast, the Pacific Coast, and offshore Alaska) bonds, whose amounts may be changed if BOEM deems them insufficient. BOEM seeks comment on the basic question of whether that two-tiered system (initial bond followed by additional bond if necessary) should be continued or changed, and whether area wide bonds should continue to be allowed. BOEM also requests comment on whether self-insurance should continue to be allowed and, if so, given the high costs of decommissioning, how BOEM’s existing criteria for such insurance should be updated. BOEM also seeks comments on a variety of specific issues, such as what factors other than inflation should be considered in revising financial assurance amounts, what amounts are “realistic” today, and whether financial assurance requirements should vary over phases of a project’s lifecycle.

BOEM’s issuance of the ANPR - and its focus on these topics - should be seen in light of its notice of a proposed rulemaking in February of this year to increase the financial responsibility limits for operators under the Oil Spill Pollution Act by an immediate 80 percent, with a proposal for a new methodology to increase the amount based on inflation going forward. At that time, BOEM stated that it was not proposing at that time an increase in the bonding or other assurance levels to back up that increase - and thus avoiding placing these immediate cost burdens on the industry participants. In this light, industry members should consider in their comments that this ANPR may well be the commencement of the rulemaking to implement these actual cost burdens, which should mirror the immediate 80 percent fly up in financial responsibility with more to come.

If you have any questions, please feel free to contact one of the Haynes and Boone team members listed below.